Unit 2

1. Unit 2 Practical Economics: How Theory Works for You!

2. Consumer Economics • Focuses on the decision making of individuals and households. • Everyone in a capitalist society is a consumer (any person or group that buys or uses goods and services to satisfy personal needs and wants). • What is an example of a consumer economics activity we have already done?

3. Two types of Income • Consumers use their income to buy goods and services • Disposable income is the money a person has left after all taxes have been paid. • Remember that people have needs and wants. • Any money that is left after paying for needs is called discretionary income.

4. Rational Choice • When consumers make decisions based on opportunity cost, they are engaging in rational choice. • The rational choice is the alternative that has the greatest perceived value. • You want the best-quality item for the cheapest amount • Can you give an example of a time when you made an irrational choice when buying something?

5. Impulse Buying • When people buy items without making a rational choice it’s called impulse buying. • Can you think of any examples? • Impulse buys usually happen when there is a limited amount of time for buyers to consider their options. • Can you think of any examples?

6. Buying Principles and Strategies • As a consumer, your goal should be to obtain the most satisfaction from your limited income and time. • What are some strategies you could use to make smart purchases?

7. Three Basic Buying Principles • Gathering Information • Using Advertising Wisely • Comparison Shopping

8. Gathering Information • Obtain information on what you are buying • Research on the internet • Read reviews • Remember, you have a scarce amount of time to research and make decisions

9. Use Advertising Wisely • Competitive advertising: Advertising that attempts to persuade consumers that a product is different from and better than others. • Informative advertising: Aids consumers by providing useful information about a product • Some companies use false advertising or bait and switch • Bait and switch: The bait is an advertised item at an unrealistically low price. When the consumer gets to the store, a salesperson points out all the bad features of the item and shows them higher priced models

10. Comparison Shopping • Comparison Shopping: Getting information on the types and prices of products available from different stores and companies. • Use competition to your benefit! • What are some situations where it’s good to comparison shop?

11. Homework: Hurray! • You need to create three advertisements for the same product. • One that is informative • One that is competitive • One that appeals to impulse buying • Your ads should be NEAT and COLORED

12. Consumerism • As a consumer, you have a number of rights and responsibilities to keep in mind. • There are some government agencies in place to look out for consumers. • Ultimately it is up to YOU to spend your money wisely

13. Consumer Rights • Consumerism is a movement to educate buyers about the purchases they make and to demand better and safer products from manufactures • The idea of consumerism has roots from the progressive movements in the early 1900s. • Journalists called muckrakers exposed corruption in business and government • Upton Sinclair’s The Junglewas published in a socialist paper. It exposed the filthy sanitation and abysmal working conditions in the stockyards and meat packing industry

14. Consumer Rights • The work of Sinclair and other muckrakers led to tighter government regulations to protect the public • Lead to the creation of the Food and Drug Act and the Meat Inspection Act • Why is consumer protection important today?

15. Financial Crisis • Banks loaned to irresponsible home owners • Banks foreclose on houses when the irresponsible owners don’t make payments and try to resale the homes for profit • Market is flooded with empty houses • Value of homes plummet • Homeowners find out that the CDO’s (Collateralized debt obligations) they were talked into buying are actually useless

16. CPA Homework • Identify how the Consumer Protection Agency attempts to protect each of the consumers’ rights.

17. CPA Homework • “Enhance understanding of insurance issues” • “The Agency’s mission is to promote transparency, simplicity, fairness and accountability, while also seeing to ensure consumers access to, and understanding of, all the information they need to make responsible choices about consumer financial products and services.

18. CPA Homework • “Agency would ban deceptive practices and oversee new consumer financial products, but its main purpose is to protect and inform consumers” • “Agency will have the power to make certain that consumers get information that is clear and concise-in plain language-so that can compare products”

19. CPA Homework • “Consumers aren’t hit with unfair rate hikes, penalties, or hidden charges” • “Brokers must look out for the interests of families if they give advice about mortgages” • “Ensure transparency and fair dealing” • “Establishes Office of Fair Lending and Equal Opportunity” • “Whistleblower protections” • “Ability to sue credit rating agencies for negligence”

20. Okay so besides the whole “banks destroying the economy dealio,” would things really be so bad without consumer rights? Well let’s take a look… http://www.hbogo.com/#series/video&assetID=GOROSTGP39832?videoMode=embeddedVideo?showSpecialFeatures=false/

21. Buying the Necessities • Food • Clothing • Home • Vehicle

22. Food • Purchasing food involves comparison shopping • Things to consider • Price • Quality • How much time do you have to spend looking around • Transportation • All of these factors must be considered when making a decision

23. Clothing • Style • Durability: The ability of an item to last a long time • Service Flow: The amount of use a person gets from an item over time and the value a person places on this use • If you buy a jacket for $400 and wear it for 4 years the annual service flow is $100. • Cost of Care (maintenance)

24. Buying/Renting a Home • The average American family spends 25-33% of their income on housing • Choosing to rent or buy a home is a BIG decision. • Most people rent homes before they buy

25. Renting • Requires a security deposit: Funds a renter lets an owner hold in case the rent is not paid or the apartment is damaged. • Renters don’t pay maintenance or real estate taxes • Allows for greater mobility • You don’t have to sell the property if you want to move • Renters sign a lease: long term agreement describing the terms in which the property is rented

26. Purchasing a House • Mortgage: An installment of debt owed on houses, buildings, or land • Closing Costs: Fees involved in arranging for a mortgage or in transferring ownership of property. • Legal costs • Loan application • Credit report • House inspections • Taxes • Buying a home in a long-term investment!

27. Buying a Vehicle

28. New or Used New used • More expensive • Lower maintenance costs • Often come with a warranty to protect owners for all major repairs. • Usually last a certain number of years or miles • Less expensive • High maintenance costs • You may not know the vehicle’s history • Always have a mechanic check out any used car you buy!

29. Owning a Car • Depreciation: A decline in value over time • All durable goods depreciate • “Wear and tear” • Outdated technology • Liability Insurance: Insurance that pays for bodily injury and property damage • Flip to page 132 in your textbook to see some of the factors insurance companies consider

30. Going into Debt!

31. Going into Debt! • Credit: The receiving of funds either directly or indirectly to buy goods and services today with the promise to pay for them in the future. • Principal: The amount originally borrowed • Interest: The amount the borrower must pay for the use of someone else’s funds. (The bank) • Installment Debt: type of loan repaid with equal payments, or installments, over a specific period of time

32. Why People Use Credit • People go into debt in order to buy expensive necessities such as cars, homes, education, and equipment. • While no one in particular is forcing them to go into debt, debt in needed to survive. • Reasons while debt is useful • Allows consumers to have access to goods and services immediately • “If you owe the bank $1 million, the bank owns you. If you owe the bank $1 billion, you own the bank.

33. Sources of Loans and Credit • Commercial Bank: Main functions are to accept deposits, lend funds, and transfer funds among banks, individuals, and businesses. These banks also make major investments on Wall Street. • Savings and Loans Associations: Depository institution that accepts deposits and lends funds. • Savings Banks: Depository institution originally set up to serve small savers overlooked by commercial banks.

34. Sources of Loans and Credit • Credit Unions: Depository institution owned and operated by its members to provide savings accounts and low-interest loans only to its members • Finance Company: Company that takes over contracts for installment debts from stores and adds a fee for collecting the debt • Consumer Finance Company: Makes loans directly to consumers at high interest rates

35. Charge Accounts and Credit Cards • Charge Account: Credit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later • Credit Cards: Credit device that allows a person to make purchases at many kinds of stores, restaurants, and other businesses without paying cash. • Debit Cards: Payment method in which funds are taken directly from your checking account. Debit Cards do not provide loans or credit.

36. Finance Charges and APR • Finance Charge: Cost of credit expressed monthly in dollars and cents • Annual Percentage Rates: Cost of credit expressed at a yearly percentage

37. Applying for Credit • Credit Bureau: Private business that investigates a person to determine the risk involved in lending to that person • Credit Check: Investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts. • Credit Rating: Rating of the risk involved in lending to a specific person or business • Collateral: Something of value that a borrower lets the lender claim if a loan is not repaid • Secured Loans are backed by collateral, unsecured loans are not

38. Personal Bankruptcy • Bankruptcy: The state of legally having been declared unable to pay off debts owed with available income • When bankruptcy is approved by a court, debtors must give up most of what they own http://www.youtube.com/watch?v=hiCilTzhXrA